Bank of England to stop accepting bonds linked to coal for key loans

Climate activists are celebrating a win after the Bank of England announced it will no longer accept certain financial agreements called bonds that are connected to the thermal coal industry. This industry is known for being very harmful to the environment.

The new rule, which starts in October, is a stricter measure against thermal coal. This is the type of coal burned in power plants to generate electricity. Environmental groups have been trying to get policies changed regarding thermal coal for a long time.

The Bank of England's decision suggests that bonds linked to thermal coal are now considered too risky. This is because the world is moving away from polluting fossil fuels towards cleaner energy sources. If this trend continues, the value of these coal-related bonds could significantly decrease or even disappear.

Ellie McLaughlin from the campaign group Positive Money described the decision as a powerful message to both the central bank and the wider financial market. She explained that earlier this summer, the Bank of England quietly stated it would no longer allow commercial banks to use thermal coal bonds as collateral when borrowing money from the central bank.

Commercial banks, such as Barclays and HSBC, regularly borrow money from the Bank of England to manage their daily operations and ensure smooth transactions. To get these loans, they must provide collateral, which is typically in the form of bonds. If a bank cannot repay the loan, the Bank of England would keep the collateral.

According to the non-profit Reclaim Finance, around 150 major financial companies globally already have some limits on their dealings with the thermal coal sector. However, activists believe this new policy from the Bank of England will encourage commercial banks to reconsider keeping assets linked to thermal coal on their own financial records.

The Bank of England stated that companies involved in thermal coal face potential financial risks due to the economy's transition to net zero emissions. The bank also mentioned it would reduce the value of bonds in other related sectors to protect itself from financial risks. This policy is considered more rigorous than those of many other western central banks, including the European Central Bank.

McLaughlin noted that the Bank of England has been less public about its climate initiatives recently. This is happening at a time when some countries are pushing back against green policies. She added that this makes the operating environment more challenging for financial companies.

However, the real impact of the Bank of England's policy will depend on how it is put into practice. McLaughlin is waiting to see how the bank will calculate reductions in bond values due to climate risks and hopes that the exclusions will go beyond just thermal coal to include all environmentally damaging activities, like expanding fossil fuel production or deforestation.